Lowe's Has Self-Help Comeback, Boosts Hopes For Rest Of The Year

Lowe's Companies Inc LOW had a comeback quarter that left analysts optimistic about the rest of the year as the home improvement chain tries to catch up to rival Home Depot Inc. HD.

Lowe’s beat analysts’ earnings estimates by 14 cents and won praise for strong comparable sales figures and better gross margins, and for strong execution under new CEO Marvin Harrison – who once worked for and helped drive improvements at Home Depot.

The Analysts

Morgan Stanley’s Simeon Gutman maintained an Overweight rating on Lowe’s with a $123 price target.

Wells Fargo’s Zachary Fadem reiterated an Outperform rating and raised the target price from $110 to $125.

KeyBanc’s Bradley Thomas reiterated an Overweight rating on Lowe's and raised the target price from $120 to $125.

Wedbush analyst Seth Basham remained Neutral on the stock, but raised the price target from $105 to $115.

The Theses

Analysts universally appreciated Lowe’s second-quarter results, breathing a sigh of relief on gross margins, which Fadem called “a wildcard” headed into the print.

Margins were much better than feared thanks to price changes and better promotions credited to Harrison’s new leadership.

The improvement should be looked at as an “all clear” for more gross margin expansion, and for estimates to go higher, Gutman wrote in a note. The company’s reiterated guidance also was a relief after the first quarter reset, he said.

“The better Q2 performance paves the way for a big, positive gross margin inflection in Q3'19 and into 2020, which should unlock meaningful earnings power,” Gutman wrote.

Self-Help Story

KeyBanc’s Thomas said the company and its new leadership team should get credit for the turnaround, not broader industry or economic factors. In fact, the improvement came despite macroeconomic factors that appeared a little disconcerting, he said, including slowing of home price inflation and sluggish housing turnover.

“We believe LOW remains a self-help story, under the leadership of new CEO Marvin Ellison, and we look for numerous initiatives to ramp through 2020,” Thomas wrote.

Thomas also expressed optimism that the macro headwinds can be mitigated by lower mortgage rates that should stimulate demand and noted consumer confidence and employment remain strong indicators.

Fadem agreed that things appear back on track, and reiterated a buy recommendation.

“While we can’t completely rule out future execution snags (following Q1 missteps), LOW shares trade at a 15% discount to Home Depot Inc. HD and … below the 10-year mean,” Fadem wrote. “Thus, we see favorable risk/reward ahead with self-help initiatives intact, valuation expansion potential, and a flexible FY19/20 model with upside.”

Even though Basham remained neutral on Lowe’s, he acknowledged the improving story, saying the company is in the best position in a decade to close the performance gap with Home Depot, and has a “compelling roadmap to boost operating margins.”

Basham also said Ellison's success in turning around fundamentals when he was in charge of U.S. stores at Home Depot “bolsters the likelihood that he can execute a very similar plan” at Lowe’s.

However, Basham wrote, “driving massive change in large retail organizations is neither easy nor quick, making execution the major risk to this story.”

Price Action

After trading sharply higher in Wednesday's session, Lowe’s shares traded around $107.88 at time of publication.

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